Credit Risk Management and Profitability of Deposit Money Banks in Nigeria: A Tobin’s Q Approach

Abstract

This study examines the effect of credit risk management on the profitability of quoted deposit money banks in Nigeria over the period 2015–2024, using a balanced panel of twelve deposit money banks. Adopting a longitudinal research design, the study employs descriptive statistics, correlation analysis, panel unit root and co-integration tests, and feasible generalized least squares (FGLS) estimation to analyse the long-run and short-run relationships among the variables. Bank performance is proxied by Tobin’s Q, while credit risk management is measured using non-performing loan ratio, loan and advances to deposit ratio, loan loss provision ratio, and capital adequacy ratio, with leverage ratio included as a control variable. The empirical results reveal that non-performing loans, loan and advances to deposit ratio, loan loss provision ratio, and leverage ratio exert positive and statistically significant effects on bank performance, whereas capital adequacy ratio shows a positive but insignificant relationship. The findings suggest that Nigerian deposit money banks demonstrated resilience during the study period, as increases in credit risk indicators did not necessarily translate into declining market-based performance. Based on these results, the study recommends strengthening credit appraisal and monitoring systems, maintaining optimal loan-to-deposit ratios, adopting prudent provisioning policies, and ensuring balanced leverage management to enhance bank performance and stability.

Keywords: Credit Risk Management; Bank Performance; Tobin’s Q; Deposit Money Banks; Nigeria